India’s financial regulator, the Reserve Bank of India (RBI), is tightening its grip on treasury operations and derivative exposures in private and foreign banks. This comes in the wake of recent disclosures about accounting mismatches at IndusInd Bank and troubling sales practices by Standard Chartered Bank. Together, these developments point to a clear message from the regulator: Indian banking must strike a sharper balance between profit-making and responsible risk management.
With increasing market complexity and rising use of structured financial products, the RBI’s actions aim to prevent regulatory blind spots and protect the integrity of the financial system—especially with regard to small and medium enterprises (SMEs), who may be more vulnerable to complex derivative risks.
The Trigger: IndusInd’s Derivative Discrepancy
In early 2025, IndusInd Bank revealed inconsistencies in its forex derivative hedging strategies and accounting treatment, which had a significant impact on its net worth—over ₹1,900 crore. The issue involved a mismatch between the fair valuation of derivatives and their treatment in the treasury books. This incident raised red flags at the RBI and prompted an industry-wide reassessment of how banks are managing derivative instruments on their books.
The RBI, in response, initiated a detailed audit of the treasury and derivative activities of not just IndusInd, but also other private and foreign banks. This includes checks on risk management frameworks, client suitability assessments, and the accounting accuracy of derivative transactions.
Standard Chartered in the Spotlight
The scrutiny deepened when Standard Chartered Bank India came under RBI’s scanner. The regulator reportedly found that the bank had sold complex derivative products—particularly “Target Redemption Forwards” (TRFs)—to SME clients who lacked sufficient understanding of the risks involved.
These instruments, while useful in hedging foreign exchange exposure, are structured products that can backfire if the market moves unfavorably. Many of the affected SMEs allegedly did not receive adequate disclosures regarding the risk-return trade-offs. Moreover, questions were raised about how these deals were recorded, the reserve provisioning around them, and whether client assessments were done fairly.
While no formal penalty has yet been announced, the bank has been asked to respond to the regulator’s concerns. The situation underlines a growing discomfort within the RBI over potential mis-selling and governance lapses in complex financial transactions.
Key Areas Under Regulatory Microscope
The RBI’s inspections are focused on several specific areas:
- Client suitability checks – Are banks properly evaluating whether a client has the financial understanding and risk appetite to use derivatives?
- Risk disclosure – Are banks transparently explaining the potential upsides and downsides of structured financial products?
- Accounting treatment – Are gains and losses from derivatives accurately reflected in financial statements? Are hedge positions marked to market appropriately?
- Capital provisioning – Are banks maintaining enough capital to cushion against adverse movements in their derivative books?
- Documentation & audit trail – Do banks have robust systems to track approvals, valuations, and client consent?
This regulatory sweep is not just procedural—it’s designed to prevent potential systemic risks arising from mismanagement or over-leverage in opaque instruments.
Why SMEs and Retail Investors Should Care
SMEs, in particular, use forex derivatives to manage currency risk when exporting or importing goods. While these tools are valuable, they require sophisticated understanding. If mis-sold or misunderstood, they can lead to massive losses.
The RBI’s concern is rooted in ensuring that the right products are matched to the right customers. The goal is to protect smaller businesses from being overwhelmed by risky instruments they weren’t fully equipped to handle.
This isn’t just a regulatory formality—it’s about preserving confidence in the banking system, especially as fintech innovations and new-age NBFCs make financial products increasingly accessible.
Impact on the Banking Sector
Banks—especially those with aggressive treasury operations—may now face stricter compliance requirements. This could slow down some of their more exotic financial product sales. However, it also means a more disciplined, transparent, and customer-aligned financial ecosystem.
Foreign banks operating in India, like Standard Chartered, may be required to align their global practices more closely with local regulatory expectations. It’s also possible that RBI will mandate additional disclosures or introduce tighter guidelines around the use of complex derivatives in SME portfolios.
In the long run, this could foster greater trust among clients and investors and reduce the risk of scandals that could damage institutional reputations.
Conclusion
The RBI’s dual action—tightening oversight across treasury operations and probing individual institutions like Standard Chartered—is a firm assertion of regulatory intent. Complex products like derivatives have an important role in modern finance, but only when matched with transparency, client awareness, and rigorous internal checks.
As India’s banking landscape evolves, the challenge will be to keep innovation in step with accountability. The latest regulatory interventions are a timely reminder that while growth matters, governance matters more.
